Dogecoin Is in a Head-and-Shoulders Pattern Despite Its Efficiency

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At this point, Dogecoin (CCC:DOGE-USD) has become an almost perfectly binary investment: you either love DOGE or you hate it. Despite profiting from it due to a ridiculously fortuitous position I initiated years earlier, I’m in the skeptical camp. Nevertheless, I can somewhat appreciate the fundamental argument for the joke cryptocurrency.

Source: Wollertz / Shutterstock

That’s right, I said fundamental argument. If you’re new to the blockchain space, you might assume that Dogecoin is nothing but pure speculation. In a way, you would be correct. But to be completely fair, a catalyst beyond the greater fool theory exists. You’ve got to decide, though, whether it’s a worthwhile one.

Let’s back up for a minute. Recently, I came across a story about private equity firm Atlas Holdings, which acquired a years-dormant coal-fired plant in upstate New York in 2014. Three years later, Atlas had converted the plant to run on natural gas. The reason? To run a hybrid powerplant-cryptocurrency mining facility.

In principle, it seemed like a creative solution for Atlas to maximize its returns. By providing power to nearby residents and mining Bitcoin (CCC:BTC-USD), the facility would provide a two-for-one revenue stream. However, there was one lingering problem: mining Bitcoin is incredibly power intensive, sparking much debate about its environmental footprint.

Sure enough, the hybrid facility attracted the ire of environmental advocacy groups, which claim the residential power generation is more or less a front to mine Bitcoin. Given the incredibly lucrative nature of the mining operation, it’s not hard to see why critics are skeptical.

But what does this have to do with Dogecoin? Although the coin started as a parody, DOGE is one of the most environmentally friendly cryptos. Dogecoin consumes about 0.12 kilowatt hours (KWh) per transaction.

Contrast that to Bitcoin, which consumes a whopping 707 KWh per transaction.

Environmentalism Is the Benefit and Bane of Dogecoin

If you do the quick math above, you’ll note that the differential in efficiency between Dogecoin and Bitcoin is almost 6,000. If efficiency is king, then it’s really Bitcoin that’s the joke here.

What you might find more remarkable, though, is that Dogecoin only ranks in fourth place in efficiency metrics, according to TRG Datacenters. The oft-discussed Ripple (CCC:XRP-USD) coin features a 0.0079 KWh consumed per transaction, which makes DOGE look profligate in comparison.

Still, for the amount of attention that Dogecoin currently enjoys, a 0.12 KWh efficiency is fantastic. Better yet, you have Elon Musk of Tesla (NASDAQ:TSLA) fame supporting initiatives that would make DOGE’s transactional process even more efficient. Indeed, Musk’s recent birthday tweet may have sent DOGE jumping higher to 26 cents.

But if you look at the charts now, a couple weeks later, you’ll notice that Dogecoin is down to about 20 to 21 cents. What gives? Isn’t an efficiency improvement great for the fundamentals?

From an environmental perspective, absolutely. But from an economic incentive point-of-view, making the DOGE network too efficient is a problem. Essentially, you would suck out the profit margin for network contributors, forcing them to consider alternative opportunities.

It’s alarming that few in the blockchain space understand that there’s no such thing as a free lunch. I chalk it up to euphoria causing folks to not think rationally. If a blockchain system improves its efficiency profile for the sake of the retail investor, somebody has to pay for that efficiency.

Since most blockchain projects are inherently decentralized, there’s no single company that picks up the tab. Instead, the mining community collectively picks up the tab, which necessarily means that their per-transaction profitability ratio declines. This means that they’ve got to make up for the lost income potential through volume.

DOGE Could Become a Victim of Its Own Success

You might think that’s an easy fix. After all, Dogecoin is already popular. But if network contributors don’t accrue enough rewards for keeping the underlying system’s lights on, then they’ll leave. Without this engagement, the network itself will likely become clunky, causing investors to seek a better opportunity.

And that’s what the head-and-shoulders pattern in DOGE is all about. Euphoria can occasionally turn questionable bets into gold. But once people start examining the true story behind the wager, they get nervous.

That’s not to say that Dogecoin can’t have another good pop because it can. But at the current price, DOGE is too rich for my blood.

On the date of publication, Josh Enomoto held a LONG position in DOGE, BTC and XRP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.